Legal Insights

Trustees must take great care when distributing death benefits: lessons from the Court of Appeal

By Geoff Musgrove, Julia Tonkin & Amelia French

• 29 May 2020 • 3 min read

Wareham v Marsella [2020] VSCA 92

Background

In a recent decision, the Victorian Court of Appeal upheld a decision of the Supreme Court and found that the trustees of a self-managed superannuation fund (SMSF) failed to give real and genuine consideration when distributing the deceased’s death benefit.

In this case, the appellants were the trustees and were the deceased’s daughter and the daughter’s husband. The respondent was the deceased’s second husband. The binding death benefit nomination was signed on the same day that the SMSF was established. The nomination had expired. Therefore, there was no valid nomination in place.

The trust deed of the SMSF gave the trustees absolute and unfettered discretion as to whom should receive the death benefit. It did not require the trustees to give reasons for any decision they make in determining as to how the death benefit should be paid.

The trustees determined to pay the whole death benefit to the deceased’s daughter, who was one of the trustees.

The Court of Appeal dismissed the appeal. The court upheld the decision of the Supreme Court which ordered that the trustees’ decision is set aside and the trustees be removed.

The court found that the trustees:

  • did not have a proper understanding of their duties under the trust deed; and
  • must exercise good faith, despite one of the trustees being a named beneficiary under the trust deed and did not do so.

The court held that even though it may have been the intention of the deceased to distribute the fund in the way the trustees had, this is not relevant where trustees have failed to give real and genuine consideration in making their decision.

Practical implications for trustees

This case has significant practical implications for SMSF trustees.

When faced with a lapsed binding death benefit nomination or no nomination by a deceased member at all, trustees must ensure they comply with the trust deed regarding:

  • notification requirements to potential beneficiaries;
  • affording all potential beneficiaries an opportunity to be considered under the deed; and
  • giving real and genuine consideration to the beneficiaries’ claim of entitlement to the fund, and to their surrounding circumstances, before they make their decision.

Therefore, it is essential that trustees understand and interpret the trust deed correctly and clearly show that they have exercised real and genuine consideration when making a determination as to how to distribute. If they fail to do so, they may not only have their decision set aside, but in particularly egregious cases, they can be removed as trustees.

Lessons for superannuation members and trustees

This case emphasises the risk that your wishes may be overridden if you do not have a valid death benefit nomination or, if your trust deed permits it, a valid death benefit agreement in place.

If you do not wish to leave the distribution of your superannuation fund to the discretion of the trustee or trustees, it is essential that you make a valid binding death benefit nomination or death benefit agreement to direct your funds to your intended beneficiaries.

When doing so, it is important that you consider your superannuation trust deed in order to make a valid nomination.

Furthermore, depending on the provisions of your trust deed and the terms of the nomination, nominations may lapse after 3 years, so you should also ensure that your nomination remains current and binding.

Does this case raise any issues of concern in respect of your personal affairs?

Get in touch with the Private Clients, Charities and Not-for-profits team.

By Geoff Musgrove, Julia Tonkin & Amelia French

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